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Professional Services Maturity™ Benchmark Reveals Stormy Seas Ahead

According to SPI Research, the leading independent technology services research firm, professional services organizations (PSOs) achieved strong growth in revenue and profits in 2015. The 2016 Professional Services Maturity™ Benchmark revealed industry revenue growth of more than 10 percent for the fifth consecutive year. However, most leading indicators — such as the size of the sales pipeline and backlog — portend stormy seas ahead.

In 2015, PS segment vitality was evidenced by strong job growth, with year-over-year headcount expanding by 7.8%. The 549 PS organizations represented in this benchmark employed over 350,000 consultants who each produced, on average, $198,000 in annual revenue. Collectively, these firms generated over $69 billion in PS revenue. Even better, these firms reported strong earnings, with average net profit of 15.5% in 2015, up from 13.2% in 2014.

On the horizon, PS headwinds signal trouble ahead. Major leading indicators — such as the size of the sales pipeline, win-to-bid ratios and backlog — were all down sharply in 2015. At the same time, voluntary and involuntary attrition rose to 12.9%, the highest level since the recession. The gap between the best performing and worst performing PSOs continued to widen. This past year, the 300 (55%) lowest-performing firms generated merely 2.1% in net profit while the top 100 (20%) generated 23.5% in net profit.

Market dynamics
In 2015, the professional services market was under pressure due to global economic conditions and the difficulties in finding and retaining talent. These factors led to modest growth, slightly higher than in 2014. Perhaps growth could have been higher, but the year proved to be a little more difficult in terms of finding and adding headcount — professional services’ most critical asset.

Because the professional service market tends to grow at least 10 percent annually, employee attrition, either voluntary or involuntary, is a critical factor in terms of revenue growth. In this year’s survey, SPI Research analyzed both voluntary and involuntary attrition. Attrition rose to 12.9% and is bound to continue to increase with consulting demand outstripping the talent supply.

Survey results
The 549 professional services organizations who participated in the benchmark, averaged 637 employees with approximately $81 million in annual PS revenue. These numbers are significant in helping analyze and compare the largest PSOs with those in the mid- and boutique-markets.

Interesting trends in sales and marketing have popped up. One is a downward trend in terms of winning new business. Firms won fewer than 50 percent of the bids they submitted. The time, expense and focus required to market and sell requires organizations to improve this percentage to a minimum of 60 percent.
Likewise, because of the issues associated with sales, the sales deal pipeline — as related to the quarterly bookings forecast — was at its lowest level at 172 percent. This is the lowest level we have seen over the past nine years of benchmarking. This issue is worrisome as it may force professional services organizations to discount more in order to build the pipeline to an acceptable level of at least 200 percent of forecast. If the deal pipeline remains at these anemic levels, firms will be forced to curtail hiring and may even have to consider staff reductions.

On-time service delivery fell in 2015 compared to 2014 — 76.1 percent and 78.3 percent respectively — and the project cancellation rate rose significantly to 2.6 percent. In professional services, any project cancelled, for whatever reason, disrupts the organization. The average project overrun also increased to 10 percent, which is the highest in five years.

Poor service execution results could be attributed to a slight reduction in the use of standardized delivery methodologies. A standardized delivery methodology serves as a blueprint which enables PSOs to more efficiently deliver services on time and on budget. Standardized delivery methods typically result in better project quality and client satisfaction. All of these factors have a strong correlation with revenue growth and profitability.

Many of the financial metrics are under pressure this year. However, the most important metric, profitability, showed a 17 percent increase relative to last year’s benchmark. Average net profit improved from 13.2% to 15.5% primarily due to reduced overhead and administration costs.

Looking forward
The beginning of 2016 has been difficult for the economy, which puts pressure on professional services organizations to streamline operations and cut costs. While there are always performance demands in PSOs, an uncertain economy will make them more difficult.

The elections in the U.S., still the world’s largest economy, add to this uncertainty. Clearly, there is frustration with government spending and the role of government, but the winner of the 2016 presidential election will have an impact on the future of the global economy.

Despite the rough start of 2016, the professional services market remains upbeat. The demand for professional services continues to rise. And employees, whose salaries and bill rates have risen, will be excited about the challenges they face this year.

New technologies continue to transform the professional services market. Nowhere is this more evident than in the social, mobile, analytics and collaboration (SMAC). These solutions, many of which are embedded in core business suites such as enterprise resource planning (ERP), client relationship management (CRM), professional services automation (PSA) and human capital management (HCM), are becoming increasingly critical to the success and growth in professional services.

Professional services is an employee-driven market. Providing the best tools that offer the best insight to employees improves their ability to perform at a high level.

For more insights
PSOs that use the 2016 Professional Services Maturity Benchmark will see how they’re performing in comparison to their competitors. It can also guide them on their transformation and growth initiatives.
We wish everyone the best of luck for a successful and profitable 2016.